4ht Quarter Report, 2005 - FRIEDBERG MERCANTILE GROUP LTD. · produced returns of 21.3% and 17.2%, respectively. On the short side, Abitibi-Consolidated Inc. returned 13.8% and New

4ht Quarter Report, 2005 - FRIEDBERG MERCANTILE GROUP LTD.

FIXED INCOME FUNDSEQUITY HEDGE FUNDS

CURRENCY FUNDSDIVERSIFIED TRADING PROGRAM

FRIEDBERG GLOBAL-MACRO HEDGE FUNDSFRIEDBERG FUTURES FUND

NIAGARA COMFORT CLASS “B” FUND

ORIGINAL DOCUMENT AVAILABLE FROM:FRIEDBERG MERCANTILE GROUP LTD.

BCE Place, 181 Bay Street, Suite 250Toronto, Ontario M5J 2T3

Tel: (416) 364-2700Fax: (416) 364-0572

Web: http://www.friedberg.cae-mail: [email protected]

44FourthQR

Dear Investor,

It gives me great pleasure to present to you the financial report of the FriedbergGroup of Funds for the quarter and year ended December 31, 2005.

Our two flagships, the Friedberg Global Macro Hedge Fund Ltd. and theFriedberg Global Macro Hedge Fund, once again posted solid gains for thequarter. In US-dollar terms, the funds gained 3.3% and 4.3%, respectively. Forthe year, again in US-dollar terms, our two funds were up 13.3% and 21.1%respectively. We explained the disparity between the Canadian-based fund andthe Cayman-based fund in detail in our last communication to shareholders. Thedisparity grew again during this past quarter, but by a more modest 100 basispoints. Once more, the difference can be attributed mostly to currencyconsiderations, which will be briefly explained below. I am satisfied that thesedisparities are of a random nature and that, in the longer run, their results willcertainly converge, given the almost identical portfolio holdings and the tendencyfor total returns of US$ and CD$ assets to converge. On an attribution basis, thefixed-income strategies once again provided the bulk of the returns: just 10 and70 basis points less than the entire quarterly gain of the Cayman and Canadianfunds, respectively, with the rest of the sub-funds and strategies gaining some andlosing some, to make up the returns noted above.

The extraordinary returns of the fixed-income strategies came primarily fromthree sources: total bond returns (including a profitable partial hedge liquidatedduring the quarter), approximately 140 basis points; Turkish money marketposition (synthetic), approximately 40 basis points; and Seabridge, a US goldmining stock, approximately 250 basis points. Rounding and managementexpenses moderately reduced these gains.

Using the larger Cayman fund as the base of our discussion, we find that slightlyover 60% remains invested in TIPS and a growing proportion, now over 33%, isinvested in short-term US Government paper, all of it under two years tomaturity. The incentive to hold longer maturities has diminished with theflattening of the yield curve. I continue to believe that interest rates are headedhigher, though I am no longer as sure as I was that the yield curve will continue

Fourth QR

to invert going forward – or at least not for quite some time. My reasoning is asfollows. I expect that the global economy will continue to grow, allowing USexports to expand further and putting more strain on US capacity. Withunemployment at 4.9%, the US is slowly moving to full capacity utilization. Thisis inconveniently timed with strong (and seemingly still rising) commodity pricesand the likely end of the historically huge gains in productivity before it resumesthe long-term pace of 1.5% to 1.7% per annum. (I don’t know any more thananyone else, but productivity spurts of this magnitude, associated withtechnological breakthroughs, generally don’t last more than a decade.) I expectinflation therefore to grind its way higher, and move towards an unacceptablecore rate of 3% soon after the present pause. The Fed, satisfied at the attainmentof more “normal” rates and now data-dependent, no doubt will look at thestabilization of house prices as a cue to slow any further increase in the FedFunds rate. In fact, I am quite certain that, by spring at the latest, the Fed willpause to reassess the picture. This is because the FOMC is now tilted towards amore dovish view and is of course led by a renowned deflation-fighter. DavidRosenberg, the first-class economic observer at Merrill Lynch, recently noted thatin the new line-up, the FOMC loses three hawks, gains one hawk and adds onedove. This will not mean, as many are hoping, that the Fed will start climbingdown by year end. Very likely, it will stay on hold for some months. However, inour opinion, long-term rates will begin to reflect the new up-leg in inflation thatwe are expecting. By the end of the year, the Fed will resume raising rates, butthis time the Fed’s actions will lag market rates. In this scenario, there is a realrisk that bond prices could fall hard.

Why are we so sure that inflation is going higher? Because US (and global)liquidity remains excessive even after this “dramatic” rise in rates. Only thisexcessive liquidity can explain the extraordinary rise in commodity prices,especially gold and other precious metals, record highs in world stock markets,incredibly narrow (and still falling) credit spreads and the formation of new andhuge private equities pools, in the face of rising rates. If real estate prices aresoftening, which we believe is true, it is only because they, more than any otherasset category, are a direct function of discount rates. As interest rates rise,regardless of liquidity conditions, real estate prices must begin to adjust to newreturns. From being negative not long ago, real mortgage rates have climbed tosomewhere between 1% (for the short-term adjustable kind) to 3.5%. In theory,rental properties can now trade between 10 and 30 times income, compared withthe infinite multiples of yesteryear. So a cap on real estate prices is inevitable.

A cap is less inevitable for assets that do not trade as faithfully off income. Thegradation, from assets most sensitive to discount rates to those least sensitive, isintuitive. Most affected are long duration fixed income for poor credits; next, the

same for better credits. Then come blue chip, large market cap stocks foremerging markets, followed by the same in developed economies; speculative, low market caps in emerging markets and, again, the same for developed countries;industrial commodity prices (affected by underlying economic cycles); andfinally, precious metals.

After this digression, let me return to our fixed-income strategy. TIPS willcontinue to do well in a scenario of rising inflation and a lagging Fed, which iswhat we foresee for the next six to 12 months. This is because breakevens, as weexplained in the past, will rise in line with inflation expectations. Only when theFed steps on the accelerator will TIPS fall, and then less than nominal bonds. Inthe meantime, our significant (and rising) proportion of near-cash, high-qualityassets will position us to take advantage of the coming bear market in bonds.

Our gold mining stock has continued to shine, up 57%, compared with the risein bullion of 10%. From a very modest 3% proportion of the fixed-incomefunds, this position has grown to as much as 6.1% of assets. The idea of puttingup to 5% of the funds in gold was originally conceived as protection againstunexpected inflation and the consequent damage to bond prices. We weremindful that the allocation was very modest but we bet on the optionality builtin to the price of the shares. It was purchased as a perpetual option on gold, withthe possibility that the funds could lose no more than about 30% of the value ofthe original stake, causing an insignificant dent in the fixed-income portfolios.On the upside, as any option would, it delivered more than what its small stakeappeared to promise. The growth of the position makes the fixed-income fundsmore vulnerable to a setback. For example, a return of gold to the mid-$400swould cut the price of these shares in half or more, representing a potential lossof 350 basis points for the fixed-income funds and approximately 2% for theglobal macro ones. We will be taking some chips off the table to cut back on this risk.

Our currency strategy produced a satisfactory return, with the FriedbergCurrency Fund up 4.37% for the quarter and the various other programs up3.2% to 3.6%. For the year, we were up 30.25% (31.07% to 31.52%) and forthree years, 21.17% (26.37% to 27.53%) annualized. We are still behind 0.08%to 4.32% at an annualized rate over the past five years, which includes theinfamous Argentina episode. Thankfully, full recovery is in sight. We very muchappreciate those of you who have had the confidence and the patience to staywith us.

There has been little newsworthy to report. We continue to be dollar friendly,hence we remain moderately short yen and euros. In addition, we are modestlyshort euro/long Czech and long Singapore/short euros. The market is digesting

the Fed’s signals of an ostensible pause in the climb of rates, but, as noted earlier,I don’t believe that the Fed is on permanent hold. Still, persistent rally attemptson the part of the yen and euro may force us to move to the sidelines.Occasionally, we have ventured on the short side of the British pound, Aussiedollar and Kiwi dollar, outright or as a substitute for euros in a cross trade butwithout much success. From where we stand, there are few tradable ideas and thegoing is tough. Where we did have some success, unexpectedly, was in thegranting of Canadian dollar puts, undertaken to help the Canadian fund(denominated in CD$) survive the relentless rise of the northern peso. Thisexplains the extra 100 to 120 basis points return for the fund compared with theother programs.

Our only disappointment for the quarter was the performance of the equityhedge funds. Down for the quarter 3.8% to 3.9% and up for the year only 3.0%to 3.1%, the funds were hit by a paucity of very few large movers. For example,our biggest two winners on the long side, Checkfree Corp. and Novell Inc.,produced returns of 21.3% and 17.2%, respectively. On the short side, Abitibi-Consolidated Inc. returned 13.8% and New York Times Co., 11.1%. These arepaltry results for a widely diversified portfolio that hopes to outperform on bothsides of the market. These are in fact the lowest returns for best performers for aslong as we can remember. The poor quarterly performance is due tounderperformance on both sides of the market, up .69% on the long side anddown 3.94% on the short side vs. the S&P 500 rise of 1.6%.

As always, when faced with dismal returns, we move to hypothesize that, perhaps,markets have become more efficient. We have advanced this pessimisticassessment a number of other times in the 16-year life of this program but,eventually, the sun has always shone through the dark clouds and we havemanaged to bounce back. What worries us more now than other times, however,is that our five-year performance is coming down to earth: up 7.53% (5.99% forthe smaller Canadian fund) annualized versus 7.24% for the benchmark. Couldit really be…? If our five-year performance does not open a more significant gapover the benchmark in the next quarter or two, we will think of reducingsomewhat the Global Macro funds’ allocation to this program.

Again this quarter the more interesting developments occurred in themiscellaneous pocket, the one we have come to call “global opportunities.” Itreturned an extraordinary 77.8% on this section’s equity, which as you recall, isdesigned to receive a maximum allocation of 3.5% from the Global Macro’s totalnet assets. (In effect, this means that the margin dedicated to this section shouldat no time exceed 3.5 % of the total net assets of the Global Macro funds.) AtDecember 31, the margin dedicated to the global opportunities section equaled

2.9% and 2.7% of the Cayman and Canadian funds, respectively. The substantialleverage inherent in futures and securities markets afforded us a substantial longexposure to gold (representing 21% of the Global Macro funds), as well assizeable commitments to crude oil (by way of bear spreads and the granting ofshort-term calls), the US-dollar-denominated Japanese Nikkei index traded inChicago (representing 1.4% of the Global Macro Funds), and copper (long buttempered with some bear spreads). See exhibits inside for details of the futures’and securities’ positions. The 77.8% performance of this section contributed anet 274 basis points to the Global Macro funds’ quarterly performance.

I remain very bullish on gold. Exploring and bringing new mines intoproduction has become an enormously expensive, lengthy and politically riskyaffair. Gold will have to attain much higher levels on a sustainable basis to reversethe present decline in production. From an investment point of view, theprecious metal has come into its own as an asset class (some might say it hasregained its status), displaying excellent returns over three and five years (48%and 89% respectively). This is bound not to escape the attention of assetallocators, who now enjoy the luxury of betting on gold via a NYSE-listed ETF.Also, it should be noted that the enormous interest of pension funds inparticipating in commodities via fully paid futures (with cash earning moneymarket returns) can have a significant impact on gold prices. Their investmentsrecently reached $100 billion to $120 billion from less than $40 billion two yearsago. Gold is one of the most liquid commodities traded on global exchanges andis likely to be over-represented if only by virtue of this liquidity and theperception that it represents a useful proxy for all commodities. Finally, it is wellknown that rising gold prices induce a sort of primal fear among holders offiduciary money. Central bankers, being human beings, are almost certain toreturn to gold once the advance breaks through some psychological price barriers(round numbers like 600, 700 or 800), and panic sets in.

To the puzzlement of most observers, gold accelerated its uptrend even as the USdollar strengthened (note that our long position was established against euros). Theparadox, however, is readily explained. As long as the US dollar was falling, hardmoney investors were happy buying euros, Swiss francs and yen. When the trendreversed, these visceral US dollar bears could not countenance buying dollars andhedging their depreciating assets. They turned to the next best thing, gold.

A note on our investment in Refco’s SPhinX Managed Futures Fund Ltd.: Themoneys, being managed by 15 of the best performing and largest CTAs in theworld, were “salvaged” from the Refco train wreck in mid-October andtransferred to Lehman Brothers, Inc., where they have continued to be managedon a daily basis. Quarterly performance was satisfactory, up 2.62%, though thefund remained down 6.59% for the year. In late December we were informed of

a temporary restraining order entered into the bankruptcy court pursuant to acomplaint filed by the Official Committee of Unsecured Creditors of Refcofreezing the assets of the fund pending a hearing to take place in mid-January.The claim is that the funds’ managers transferred money out 5 days prior to theOctober 17 Refco Bankruptcy filing. As a result, redemption rights weresuspended. Under legal advice, we wrote down the value of the holding to 50%of its NAV, which represented an 85 basis points charge to the Global Macrofunds’ NAV, given our 1.7% exposure. We are unsure of the final outcome andbelieve that the write-down is realistic. Should we need to write down the entireinvestment, an unlikely event we think, the additional charge will equalapproximately 85 basis points. Irrespective of the outcome, we have beendeveloping for the past year and a half an in-house capability that essentiallyshadows the results of these trend-following CTAs with the intention to taketheir place. We are close to making that decision.

In sum, we ended the year on a far better note than we had expected. (This iswhat we said last year: “Though somehow we feel that the present positions willkeep us whole, risk/reward ratios are no longer lopsidedly in our favor. Thismuch we know: Every hundred basis points above the risk-free 3% per annumwill be a struggle. Let’s hope we sin of pessimism.”) Some of that success can beattributed to catching the train on gold, directly via futures and indirectly viashares of Seabridge, and to other felicitous commodity and currency operations.Equally important, we held our own in most other areas, where returns turnedout to be as skimpy as expected and/or feared. Valuation metrics are over-extended everywhere and complacency rules the globe. It all feels like anotherswift and unforeseen crisis is about to erupt, à la 1998 or worse, and yet thetriggering event is unforeseeable and the cost of betting on such an event, even ifforeseeable, is too onerous. For the year ahead, we have a scenario but are unsureof its precise timing. Absent exquisite precision, we should still bring homeTreasury returns; the hope is that we can spruce them up again with someintelligent speculations.

Thanking you for your confidence and trust,

Albert D. Friedberg

CONTENTS

FIXED INCOME FUNDS

EQUITY HEDGE FUNDS

CURRENCY FUNDS

DIVERSIFIED TRADING PROGRAM

FRIEDBERG GLOBAL–MACRO HEDGE FUNDS

FRIEDBERG FUTURES FUND


All statements made herein, while not guaranteed, are based oninformation considered reliable and are believed by us to be accurate.Futures and options trading is speculative and involves risk of loss.

Past trading results are not indicative of future profits.

The funds seek total investment return, consisting of a combination of interestincome, currency gains, and capital appreciation, by investing in both investment

grade and non-investment grade fixed income obligations denominated in avariety of currencies.

LOW RISK. Objective: Absolute Returns

FIXED INCOME FUNDS

FRIEDBERG FOREIGN BOND FUNDFRIEDBERG TOTAL RETURN FIXED INCOME FUND LTD.FRIEDBERG TOTAL RETURN FIXED INCOME FUND L.P.

PERFORMANCE1

as of December 31, 2005

Year Two Three FiveNAV Quarter over Year3 Years3 Years3 Years3

Friedberg Foreign Bond Fund2 16.84 2.75% 12.38% 10.03% 9.29% 9.34%

Friedberg Total Return Fixed Income Fund Ltd. 1,991.95 3.15% 10.80% 11.34% 16.46% 13.85%

Friedberg Total Return Fixed Income Fund L.P. 210.71 4.10% 11.94% 11.69% 17.32% 14.80%

Benchmark4 N.A. -1.12% 5.41% 9.65% 8.77%

1Net of fees2Priced in Canadian Dollars3Compounded annual rate of return through November 2005470% Merrill Lynch Broad Market Index (Bloomberg GBMI), 30% Global High Yield and Emerging Markets PlusIndex (Bloomberg HAOO)

Currency Exposure

Adjusted modified duration 4.58Approximate overall credit rating AAA

Bond rating breakdown: AAA 93.89% Unrated 6.11%

U.S. Dollars 63.22%

Canadian Dollars 24.19%

Turkish Lira 12.59%

Portfolio Allocation

U.S. Treasury Inflation Protected Securities 3.625% Dec. 2028 43.70%

Canada Gov-t. Real Return Bonds 4.25% Dec. 2026 18.08%

U.S. Treasury Notes 2.00% Jan. 2006 17.27%

U.S. Treasury Inflation Protected Securities 2.00% Jan. 2014 6.58%

Seabridge Gold Inc. shares 6.11%

U.S. Cash 5.64%

U.S. Treasury Bond 3.25% Aug. 2007 2.63%

Weighted average yield to maturity 2.31%* Weighted average current yield 2.48%*

*Assumes zero inflation.

FRIEDBERG FOREIGN BOND FUND




U.S. Treasury Inflation Protected Securities3.625% Dec. 2028 50.53%



U.S. Treasury Inflation Protected Securities2.00% Jan. 2014 5.44%

U.S. Cash 5.02%


U.S. Treasury Bond 3.25% Aug. 2007 2.54%

Currency Exposure

U.S. Dollars 80.85%

Turkish Lira 13.22%




Currency Exposure

U.S. Dollars 77.98%

Turkish Lira 14.05%







U.S. Treasury Inflation Protected Securities2.00% Jan. 2014 5.20%

U.S. Cash 3.39%




FRIEDBERG TOTAL RETURN FIXED INCOME FUND L.P.

FRIEDBERG TOTAL RETURN FIXED INCOME FUND LTD.

FIXED INCOME FUNDS cont’d

EQUITY HEDGE FUNDS

PERFORMANCE1

as of December 31, 2005Year Three Five

NAV Quarter over Year2 Years2 Years2

Friedberg Equity Hedge Fund 21.86 -3.91% 0.93% 13.98% 5.99%Friedberg Equity Hedge Fund Ltd. 2,551.48 -3.78% 0.80% 13.06% 7.53%CSFB/Tremont Equity Market Neutral Index N.A. 5.53% 6.35% 7.24%

1Net of fees2Compounded annual rate of return through November 2005

INVESTMENT ALLOCATION3

30-Sep-05 31-Oct-05 30-Nov-05 31-Dec-05LONGS 48.77% 47.74% 48.28% 48.36%SHORTS 51.23% 52.26% 51.72% 51.64%TOTAL GROSS LEVERAGE 1.45 x 1.60 x 1.58 x 1.73 x

LARGEST SECTORS (LONGS)3 LARGEST SECTORS (SHORTS)3

Electric Utilities 8.54% Thrifts and Mortgage Finance 8.57%Industrials Large Caps (S&P 500 index) 7.07% Publishing 6.52%Semiconductors 3.81% Pharmaceuticals 5.35%

3As percentage of total gross assets (based upon the Friedberg Equity Hedge Fund Ltd.)

LARGEST LONG POSITIONS LARGEST SHORT POSITIONSS&P 500 index Eli Lilly & Co.Syngenta AG-ADR Imclone SystemsGATX Corp. Colgate-Palmolive Co.Aqua America Inc. Sara Lee Corp.Raytheon Co. Forest Laboratories Inc.Firstenergy Bowater Inc.Home Depot Inc. Waddell & Reed FinancialExelon Corp. Univision CommunicationsCheckfree Corp. Estee Lauder CompaniesCenterpoint Energy Inc. Knight Ridder

BEST QUARTERLY PERFORMANCELONGS SHORTS

Checkfree Corp. 21.36% Abitibi-Consolidated Inc. 13.83%Novell Inc. 17.26% New York Times Co. 11.09%Syngenta AG-ADR 16.57% Flagstar Bancorp Inc. 10.39%

WORST QUARTERLY PERFORMANCELONGS SHORTS

M T R Gaming -14.36% Ryder System Inc. -19.87%Fresh Del Monte Corp. -16.35% Estee Lauder Companies -22.64%Human Genome -41.28% Georgia-Pacific Corp. -52.75%

FRIEDBERG EQUITY HEDGE FUND LTD.FRIEDBERG EQUITY HEDGE FUND

An equity fund that seeks absolute returns through the judicious selection oflong and short positions while maintaining a market neutral posture.

PAIRSLong Advanced MicroDevice Inc. / ShortIntel Corp.

Speculative trading in currency futures instruments, currency forwards and options.

CURRENCY FUNDS

PERFORMANCE1


Year Three FiveNAV Quarter over Year3 Years3 Years3

Friedberg Currency Fund2 11.46 4.37% 30.25% 21.17% -4.01%The First Mercantile Currency Fund 10.08 2.34% 18.88% 19.61% -4.32%Friedberg Currency Fund II Ltd. 850.54 3.12% 31.07% 27.53% 2.74%Friedberg Forex L.P. 12.04 3.26% 31.52% 26.37% -0.08%Barclay Currency Traders Index N.A. 1.31% 5.55% 5.30%

1Net of fees2Priced in Canadian Dollars3Compounded annual rate of return through November 2005

OPEN POSITIONS - December 31, 2005

Long Czech Koruna / Short Euro Currency 2.07Short Euro Currency 1.51Long Singapore Dollar / Short British Pound 1.01Short Japanese Yen 0.90Long Turkish Lira 0.73Short Japanese Yen 8662 Calls 0.00

Leverage

gross leverage at December 31, 2005 6.22 xmaximum gross leverage during quarter 6.71 x

ACTIVITY REPORT - Fourth Quarter 2005

profit as percentage percentagePROFITABLE TRANSACTIONS of beginning equity of total profits

Short Japanese Yen 4.52 51.56 Long Turkish Lira 1.61 18.33 Long Singapore Dollar / Short British Pound 1.24 14.20 Short Euro Currency 1.19 13.62 Short Japanese Call Options 0.20 2.29

loss as percentage percentageLOSING TRANSACTIONS of beginning equity of total losses

Short New Zealand Dollar -3.32 62.11Long Czech Koruna / Short British Pound / Short Euro Currency -1.43 26.77Long Czech Koruna -0.19 3.64Short Australian Dollar -0.40 7.48

FRIEDBERG CURRENCY FUNDTHE FIRST MERCANTILE CURRENCY FUND

FRIEDBERG CURRENCY FUND II LTD.FRIEDBERG FOREX L.P.

DIVERSIFIED TRADING PROGRAM

PERFORMANCE1

as of December 31, 2005Year Three Five

NAV Quarter over Year2 Years2 Years2

Friedberg Diversified Fund 21.39 27.70% 166.39% 31.69% 25.57%CSFB/Tremont Managed Futures Index N.A. 3.22% 9.35% 10.00%

1Net of fees2Compounded annual rate of return through November 2005

OPEN POSITIONS - December 31, 2005

Strategy I

LeverageLong distant / Short nearby Crude Oil 5.83Long distant / Short nearby Copper 1.90Long Gold / Short Euro Currency 2.96Long distant / Short nearby Natural Gas 0.52Short Mini Nasdaq Futures 0.39Long Wheat 0.32Long Orange Juice 0.09


Strategy II (discontinued November 28, 2005)gross leverage at December 31, 2005 0.00 xmaximum gross leverage during quarter 561.92 x

Strategy IIILong distant / Short nearby Lean Hogs 0.38


Speculative trading of commodity, interest rate, and stock index futures,over-the-counter forwards and options markets.

FRIEDBERG DIVERSIFIED FUND


Strategy I

profit as percentage percentagePROFITABLE TRANSACTIONS of beginning equity of total profitsLong distant / Short nearby Crude Oil 25.33 49.06Long Gold / Short Euro Currency / Short Australian Dollar 17.51 35.51Long distant / Short nearby Natural Gas 6.62 12.82Long Orange Juice 0.87 1.68Long Wheat 0.49 0.94

loss as percentage percentageLOSING TRANSACTIONS of beginning equity of total lossesLong U.S.T-Bonds -2.69 50.48Long distant / Short nearby Copper -1.34 25.12Short Nasdaq Futures -1.02 19.24Short Eurodollar Interest Rates -0.27 5.16

Strategy II (discontinued November 28, 2005)

profit as percentage percentagePROFITABLE TRANSACTIONS of beginning equity of total profits

loss as percentage percentageLOSING TRANSACTIONS of beginning equity of total lossesLong nearby / Short distant Heating Oil -99.29 98.24Short Copper -0.80 0.79Long distant / Short nearby Crude Oil -0.68 0.67Long 3-Yr. Bund / Short U.S. 5-Yr. Note 0.18 0.17Long Corn -0.13 0.12

Strategy III

profit as percentage percentagePROFITABLE TRANSACTIONS of beginning equity of total profitsLong distant / Short nearby Natural Gas 0.25 100.00

loss as percentage percentageLOSING TRANSACTIONS of beginning equity of total lossesLong / Short Lean Hogs -0.02 100.00

DIVERSIFIED TRADING PROGRAM cont’d

PERFORMANCE1


NAV Quarterly Year over Year2 3 Years2

Friedberg Global-Macro Hedge Fund Ltd. 1,697.94 3.31% 14.57% 13.97%Friedberg Global-Macro Hedge Fund 17.55 4.34% 21.34% 19.37%CSFB/Tremont Hedge Fund Index N.A. 7.60% 10.65%1Net of fees2Compounded annual rate of return through November 2005

Allocation of the Friedberg Global-Macro Hedge Fund Ltd. as of December 31, 2005 is as follows:

FUND CURRENT ALLOCATION PROPOSED NEW ALLOCATIONFixed Income Fund Ltd. 64.107% 60.00%Equity Hedge Fund Ltd. 13.910% 10.00%Currency Fund II Ltd. 14.310% 10.00%Commodities 0.000% 14.15%3

Equities 0.000% 5.00%Miscellaneous / Special Situations 6.452% 0.00%Refco SPhinX Managed Futures Index Fund Ltd.4 0.854% 0.85%Cash 0.366% 0.00%

100.00% 100.00%

3Equal to maximum 3.5% margin of the entire program Quarterly return Year-to-date return4Refco SPhinX Managed Futures Index Fund Ltd. 2.62%* -6.59%*

*as of December 29, 2005

GLOBAL-MACRO HEDGE FUND LTD. - miscellaneous special situation sector

EQUITIES% change for the

NAME opening price closing price Quarter by priceNew Germany Fund 10.47 10.15 -3.06%Cardero Resources 3.84 5.20 35.42%Japan Small Cap Fund 17.58 17.78 1.13%CANTV ADR (short) 12.32 14.30 -16.05%Enersis 11.47 10.99 -4.18%Counsel Corp 0.36 0.37 2.53%

% returnEquities 0.05%Options 1.78%Commodity Futures 72.95%

FRIEDBERG GLOBAL-MACRO HEDGE FUNDS

A fund of (Friedberg) funds and strategies. Allocations are reviewed periodically.

FRIEDBERG GLOBAL-MACRO HEDGE FUND LTD.FRIEDBERG GLOBAL-MACRO HEDGE FUND

FRIEDBERG FUTURES FUND

The Futures Fund combines the Currency and Diversified programs inapproximately equal weights. Please refer to our earlier graphs and tables

regarding these programs.

LIQUIDATED FUNDS

OPEN COMMODITY POSITIONS - December 31, 2005

Long Gold / Short Euro Currency 9.32 Long distant / Short nearby Copper 1.00 Long distant / Short nearby Crude Oil 3.23 Long Nikkei Futures 0.32 Short February Crude Oil 61 calls 2.02

Leveragegross leverage at December 31, 2005 15.89 x


profit as percentage percentagePROFITABLE TRANSACTIONS of beginning equity of total profitsLong Gold / Short Euro Currency / Short Australian Dollar 101.39 65.77 Long distant / Short nearby Crude Oil 42.63 27.65 Long Nikkei Futures 9.81 6.36 Long distant / Short nearby Copper 0.33 0.21

Inception Inception Liquidation Liquidation Size of Fund Annual %Funds Date N.A.V. Date N.A.V. at liquidation Rate of ReturnFriedberg Global Opportunities Fund Ltd. 13-May-97 1,000.00 28-Feb-05 501.89 US$ 5,700,000 -8.46%Friedberg International Securities Fund 31-Mar-98 10.00 30-Nov-05 11.49 US$ 4,500,000 1.83%

FRIEDBERG GLOBAL-MACRO HEDGE FUNDS cont’d

PERFORMANCE1

as of December 31, 2005Year Three

NAV Quarterly over Year2 Years2

Niagara Comfort Class ‘B’ Fund 14.38 -1.91% -1.30% 6.44%CSFB/Tremont Hedge Fund Index N.A. 7.60% 10.65%1Net of fees2Compounded annual rate of return through November 2005

David Rothberg Comments:

The Comfort Fund was down 1.91% during the fourth quarter, net of all fees.

The allocation as of the end of the quarter and returns per strategy were as follows:

Strategy Allocation in Percent Return in PercentLong/Short Value U.S. 36.90 -1.00Long/Short Momentum 20.66 -3.91CTA / Managed Futures 14.57 -1.44Convertible Arbitrage 22.65 0.10Cash & Treasuries 5.23 N/A

This quarter is the fourth in a row in which we’ve failed to keep pace with our objectives. Ourobjectives are to earn bond like returns that are not subject to bond or stock market risk. Since westarted the fund in 1999 we’ve come close to achieving our goal by investing in a concentratedportfolio of convertible bond arbitrage, risk arbitrage, equity long/short, and managed futuresstrategies. I don’t believe those strategies will satisfy us going forward and have decided to change theFund’s strategy by focusing only upon managed futures.

Too much inefficiency has been mined out of arbitrage strategies. Despite the wave of mergers inrecent years, we saw the risk arbitrage specialist with whom we had been invested since our debutdevoting ever fewer assets to risk arbitrage, and ever more to other corporate events; i.e. gambitswhich ultimately are highly correlated to equities. Convertible arbitrage confounded the views Iexpressed in these pages at the end of each of the past three quarters — namely, that the strategywould recover after the slew of redemptions it suffered during the first and second quarters reducedthe demand upon issuance. Clearly, the problem has as much to do with issuers being much moresophisticated, that is, able to price supply more efficiently than I had thought, as it does withaggregate assets, or demand.

Equity long/short has suffered from a dearth of dispersion; that is, of lack of stocks going up by agoodly amount at the same time as another decent swath of stocks is doing the opposite. In otherwords, equities have been too bland. Now maybe dispersion is a function of volatility, in which casewe’d be inclined to diagnose the lull as temporary. On the other hand, it may be that optionsspecialists have managed to temper the play of stocks, or to put it another way, have mined aninefficiency from stock markets in much the same way as specialists have sucked the juice out ofarbitrage strategies.


The fund is a multi-strategy fund-of-funds. The objective is to generate steadyreturns in all environments. Albert Friedberg and David Rothberg co-manage.

These problems are compounded by our small size and by fees that, in the current environment, aretoo high. If we want to maneuver into different strategies we have to undertake more due diligencethan we have resources to devote. This leaves us vulnerable to a number of risks, the worst of which isbusiness risk. If billion-dollar funds of funds could get caught in the Bayou debacle, who are we toclaim invincibility?

Finally, as far as fees go: charging a management fee of 1% and an incentive fee of 10% on top of the2% management and 20% incentive fees that the underlying managers charge is simply too onerouswhen there is, as there has been, so little gravy on the plate.

Managed futures offer us a much better opportunity to achieve the fund’s objectives than the currentportfolio. The strategy provides five distinct advantages:

• The fifty-odd futures markets available to trade give us more and better diversifiedopportunities than the sum of the four strategies to which we have been allocating so far.

• Having started in the futures business in the 1970s, it is the strategy we understand best —probably as well as anyone in the world.

• Managed futures cannot correlate to stocks or to bonds except coincidentally.

• Because of the asymmetrical needs of hedgers and speculators, and because of a significantnon-professional speculative presence in futures markets, the inefficiencies in futuresmarkets are unlikely to vanish.

• We can invest in managed futures via managed accounts which can be held at Friedberg(rather than investing them in funds controlled by outside managers). This eliminates allbusiness risk. In addition, we get daily transparency thrown in for free.

Albert Friedberg and I have been working since April on selecting CTAs or managed futuresmanagers. We’ve developed an original process. When we started, our intention was to construct aportfolio that would aim for returns in the high teens. While we render that portfolio into fundformat by mid-year, we can use a de-leveraged version of the portfolio beginning in February toachieve our goals in the Comfort Fund. We have sent redemption notices to the managers with whomwe have been invested — not a pleasant task given that each performed scrupulously — and will startas soon as we retrieve assets.

Finally, the new portfolio allows us to reduce fees to a 2% management fee and 20% incentive feenet; in other words, the same as the underlying managers have been charging us thus far, without the1% and 10% surcharge.

In summary, out with the old and in with the tried and new. We hope you share our enthusiasm.

If you have any questions, please contact me.

Thank you for your confidence and trust.

David Rothberg

NIAGARA COMFORT CLASS “B” FUND cont’d

FRIEDBERG MERCANTILE GROUP LTD.

BCE Place, Bay Street, Suite Toronto, Ontario

Tel.: () 364-2700Fax: () 364-0572

www.friedberg.cae-mail: [email protected]

Documents

4ht Quarter Report, 2005 - FRIEDBERG MERCANTILE GROUP LTD. · produced returns of 21.3% and 17.2%, respectively. On the short side, Abitibi-Consolidated Inc. returned 13.8% and New